Can they ever be reset? Or will one day a regular chocolate bar cost for example €50? House that costs €200k cost €1,000,000? Will the likes of the euro or US dollar one day be the same as currencies such as the YEN where “1” of them is essentially worthless?
In: Economics
Deflation of a currency is typically quite bad for an economy. When goods will be worth less tomorrow than it is today, you are incentivized to not spend money. If you think a car will cost 20k next year, but 30k this year, you can weigh if that 10k you gain by waiting is worth the wait. This is very bad for economy at scale because a large percentage of people will shift towards spending as little as possible today in order to get bigger returns later. With less people willing to spend money, products need to lower in value further in order to give incentive to spend now rather than later. This can spiral into total economic collapse.
Because of this, the governments of the world with strong central banks work very hard to maintain a constant state of inflation. The goal is typically an inflation of around 2-3% per year. At this level of inflation people do have incentive to spend now rather than later as that car will never get any cheaper than it is today. Its also low enough that consumers are incentivized to take on risk and invest in order to beat inflation. All of this helps grow the economy of a country.
This means that in general deflation is not something any government will ever want to willingly implement. We will not be going back. In the event the prices themselves are cumbersome, such as a chocolate bar being 50 bucks, a governments would look toward “redenomination”. This is simply a government issuing a new currency and exchanging it with all existing currency in order to tidy up numbers. For example they could issue the New Dollar, which is worth 50 Old Dollars. All Old Dollars are converted to New Dollars. All payment is now in New Dollars, and so can be divided by 50. This effectively solves the price problem, but has limited economic impact.
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